The two markets evolve with some disparity across different districts, but the citywide average remains stable or on the rise, making it difficult for many citizens to access housing.

Author: pmartinez-almeida

Source: Idealista

The Cadastre reference value has been in effect for a year, and according to real estate agencies, appraisers, and tax lawyers, it has been used to “inflate” the value of many properties. Real estate agents report that this new value burdens home purchases by buyers with limited savings and small investors who no longer find purchasing a rental property attractive. It also makes sales of part of a property in cases of divorce or inheritance less feasible, that is, in cases of property partition or division of common property.

José María Salcedo, an expert lawyer in tax procedures, asserts that this value sometimes threatens the feasibility of property division operations. For instance, in a divorce, if the parties want to sell the property, which is valued by the two owners at €300,000, the cash compensation that one of them should receive is €150,000, corresponding to 50% of the property’s value. But what happens if the Cadastre reference value is €450,000? How does this affect the cash compensation the co-owner keeping the property has to pay and the taxation of the operation?

The same issue arises in the case of an inherited property owned by multiple beneficiaries. Market values may bear little resemblance to the Cadastre reference value if the latter is higher. In such cases, excess allocations occur.

The General Directorate of Taxes considers the purchase of a share of the property from the other co-owner, in exchange for cash compensation, not subject to the Property Transfer Tax (ITP). Therefore, this is not a sale per se, but rather a specification of rights. Hence, these operations are taxed under the Documented Legal Acts Tax (AJD), through the notarial document.

Thus, one might think that the reference value does not affect these operations, given that they are taxed by the notarial document rather than a sale. However, Article 30.1 of Royal Legislative Decree 1/1993 (ITP Law) is clear in stating that, when the tax base of the AJD “is determined based on the value of real estate, this value cannot be lower than that determined according to Article 10 of this consolidated text.”

José María Salcedo clarifies this point: the rule refers to Article 10 of the ITP Law, which establishes that if real estate is transferred, the Cadastre reference value is the new tax base. This is unless it is deeded at a higher value.

Therefore, in the case of a dissolution of a community of property or, equivalently, the allocation of the property to one of the co-owners, the tax base for the AJD must be calculated based on the reference value, when this value exceeds the value at which the partition of the property is intended to be deeded. Hence, knowing the property’s reference value is crucial.

In a case resolved by the General Directorate of Taxes, two siblings inherit two properties of equal value. They decide to end the co-ownership by each taking one property without compensating the other in cash. What is the problem? The Cadastre reference value of one property differs from the other by €20,000.

“For the General Directorate of Taxes, the Cadastre reference value has the capacity to generate excess allocations not contemplated in the operation as initially intended. The taxpayers must pay taxes on these excess allocations. If they are compensated in cash, the tax will be on the Property Transfer Tax (ITP). If not compensated in cash, the excess must be taxed under the Inheritance and Donations Tax (ISD),” explains Salcedo.

However, the Supreme Court has clarified which excess allocations are subject to taxation under the ITP and ISD and which are not.

Supreme Court Rules Out Taxation on Property After Divorce

The Supreme Court has sided with taxpayers against the criteria of regional tax authorities. Specifically, it allows not taxing the allocation of the habitual residence after a divorce under the Inheritance and Donations Tax (ISD) because it considers there is no donation when one ex-spouse keeps the habitual residence and assumes 100% of the mortgage. In a ruling dated July 12, 2022 (case 6557/2020), the high court opens the door for tax refund claims.

In other words, the high court deems that excess allocation not compensated in cash should not be taxed as a donation. Why? According to José María Salcedo, for two reasons:

1. Excess allocations are only provided for under the ITP and are only taxed under this tax, not under the ISD. This is true regardless of their origin.
2. In these cases, there is no necessary “animus donandi” or intent to donate, to consider it a donation. The unequal distribution is due to the introduction of the reference value, not the intent of the co-owners for one to receive more than initially held in the co-ownership. There is no intention to make a donation, nor acceptance of such a donation by the other co-owner.

What Happens with the Sale of a Share of the Property Under ITP

When a co-owner keeps the property and, due to a higher Cadastre reference value than the market value, there is an excess allocation, this can indeed have consequences for the ITP.

The law stipulates that the excess allocation must be declared by the taxpayer, due to a Cadastre reference value exceeding the market value.

However, the taxpayer can avoid taxation on this excess allocation if they prove that the excess was unavoidable, recalls José María Salcedo. In other words, that it was not possible to carry out a property division that better respected the equivalence of allocations.

If the inevitability of the excess allocation cannot be opposed, the taxpayer will have to pay tax on it. In this situation, their only option to avoid such taxation, notes Salcedo, will be to challenge the Cadastre reference value. This can be done through a rectification of self-assessment or by contesting the tax assessment notified by the Administration to annul the value and ensure the declared values in the transaction prevail.